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Correction Bottoming Amidst Angst

September 16, 2000

Projected corrective action . . . for September's first half was our call, as you know; and it may not be over (too choppy to say that, though getting potentially close), although allowing interim interruptions in the downside, in harmony with Expiration considerations, remains reasonable. In that regard we thought the list provided a fairly good accounting of itself on Wednesday, as there hasn't been much motivation to stimulate buyers; but every time the market turns (especially with respect to the better performing among the NASDAQ stocks, and likely those with a larger short-interest trapped or positioned after-the-fact of a projected September decline), rebounds are fast. The Nasdaq 100 (NDX), in particular, rebounded nicely even without Intel's (INTC) participation. (And we have not changed our view about it in the longer term; following post-breakout selling.)

Certainly these fast market conditions may unnerve investors (that's surely understandable); however it's also a clue that institutional money managers are using such purges for the gradual filling-out of portfolio positions they desire; at least in our opinion. Historically, particularly amidst the greatest nervous and neurotic periods in the financial press during Septembers (occasionally Octobers) more focused money managers focus on one basic pursuit: the accumulation of equity positions at relatively low prices (in this case compared to what we described as an overbought, albeit forecast August rally), and almost irrespective of all the 'noise' about energy, interest rates, earnings and politics. (The time to figure out the Fed was about done, that high energy prices in fact risked slowdowns and/or recessions, and that the Euro was weak, was months ago, or even early this year, when we forecast events would dissuade Fed hikes in the 2nd half; not just now.)

This is sometimes facilitated by not only concurrent emotional selling, but early tax-selling, as the more momentum-oriented among managers (and investors) change seats on the same flight, as they try to maximize the offsetting loss utilization against short-term gains they accrued early this year, or anticipate towards yearend. Sometimes they do this simply to play the wash-sale games with a desire to reposition in the very same issue later-on; but that's increasingly not an objective given the relatively comparable action by many stocks within a given industry or sector grouping.

We would not go so far as to suggest anybody would downgrade a particular stock to assist their dropping it into a more attractive area for institutional buyers, but would argue that many made a very honest error in expecting the post-Y2k era to maintain preceding growth rates during the 1st half of the year, and likewise were incorrect forecasting some horrible 2nd half disappointments. I suspect that assisted some analysts (and even technicians) in being excessively bullish earlier in the year when we warned, and excessively bearish around our forecast May lows. Many got too belatedly bullish in our expected August upside push, so we were encouraged to look for what in fact we got on the downside after Labor Day (in lieu of the buying some incredibly expected), as we work towards a completion of this move, and then the next phase of the Fall 2000 forecasts.

(We apologize that parts of our excerpt may not be easy for non-subscribers to understand with respect to the future; that's because the majority of forward calls and stock comments are for subscribers. Our purpose here is to give a general idea of what we've just done, are doing, and a general outline of our we feel about the markets. We are nevertheless pleased to provide these brief synopsis, and hope they are of value, as most of you feel they are. As we are not brokers or money managers, our only income is subscription-based, thus a necessity of not providing more detailed analytical interpretations and projections; either for markets, or certainly specific stocks.)

So surely there are companies here and there that will disappoint for a Quarter or two; others in fact that will elate, and others that will be boring. That's a normal function of the market. What so many missed (and we've often pointed-out) were impacts of currency conversions (such as from the Euro to the Dollar), which were expected to impact the multinationals so much more than the domestic-centric companies. Even such events come to an end, and this one may be correlated to both the end of advance earnings-warnings, and also the forecast topping action of crude oil.

There is no doubt that oil moved higher than we desired initially, but a key point of the rise to us was the impact on discretionary spending in those countries which thought they could so handily tax their citizenry (U.S. taxes are higher, but nothing compared to most European countries); that it softened their economic clout this year, in some cases prevented strong equity markets holding together, and in other cases had the effect of a multi-pronged assault on consumers, by virtue of the fact that all oil contracts are denominated in Dollars; hence the strong Greenback basically in a way added insult-to-injury to the bottom-line cost of petroleum products in Europe and Asia. It's precisely that reason why, having called for a stable-to-strong Dollar for years, in August warned here that it was getting too strong, and that combined with firm Oil was setting up stock declines.

That occurred (with the blow-off in crude on schedule), and should no longer be news; though it is, particularly in the reactive media, and where it politically enables certain positions that almost tempt one to believe particular politicians would be happy if Oil stayed high until after November. It won't; because impacts on psychology and consumption is more immediate, especially abroad. If that's correct, about a month from now the moderating oil scenario we indicated early this week will tend to contribute to explanations on the Street as to why the stock market resumed upside.

Once we saw players increasingly nervous, the chances (especially in non-Euro-impacted areas, such as we've forewarned over the last month or so) of comebacks ahead of the Triple Witching came to the forefront of thinking. We had the ideal pre-Labor Day target goals reached late last month (August), and now we have the initial minimum goal for the downside probed today in the December S&P. The number we had trotted out here and on the (900.933.GENE) hotline, was in the area of 1495; coincidentally that turned-out to be the low touched today. However we must emphasize that rallies have to be considered rallies within the overall September correction call, until affirmed to be otherwise by action going above (certain) key technical levels. As outlined in the last day or so, this is probably being set-up by a few stocks now, with others to follow. What would be particularly interesting would be those stocks (most of which we don't own) for which a generalized soft earnings report is anticipated (conclusion is forward, thus is reserved).

Daily action . . . as a result of a building oversold, and for the first time this month, since interim anticipated corrections commenced, sees us actually being a little bit bolder on the long-side of the ledger, with an approximate1497-99 December S&P long retained (simply as a guideline; recognizing that many players almost always close positions) overnight on the hotline. We will be pleased if the PPI is benign (balance is reserved for readers).

Technically and Bits & Bytes: (reserved subscriber sections; first discuss the psychology of top and bottom behavior, and then individual stocks, which are not to be construed as buys, sales, or holds, and not shorts); as comments on suggested patterns are only provided via our services. It might be notable that this issue touches on last year's 'pick of the year' Conexant (CNXT), spun from Rockwell; on TiVo (TIVO), which just got funding and a deal affirmed by America Online (AOL); on Rambus (RMBS), comments about LightPath (LPTH), and Wave Systems (WAVX).

Economic News & Releases: (reserved section)

In summary . . . the market came under further pressure, generally on schedule, partially in the wake of news-responses (both Oil and Fed related), and partially as the market continues to be in a worrying mode as regards current quarterly earnings warnings, which here and there are still a factor (though we're much more interested in corporate expectations about next year than last summer). We continue to believe the major computer companies will do o.k. for Q3 and actually be stronger on the upside in Q4 than generally thought, if the economic shocks are discounted.

With target S&P levels reached over three weeks ago, projected to precede this fast September correction likely into the higher 1400's, and mostly in the first half of the month, allowing for bump ups related to the Expiration, none of this should be particularly surprising, or even excessive for what normally occurs in pullbacks. What would have been very stunning, would have been had the common mentality of buying and thrusting forward after Labor Day somehow been able to prevail, but it wasn't expected to, and didn't. Many of the players were looking for a decline in the 2nd half, but our view was the 1st half of September (and a little more after the Expiration), which is working towards conclusion, and with some chances for firming out of extreme nervousness into renewed strength late this month. Last night we noted we're near an inflection spot on a daily basis, which could again promulgate an upside reversal effort. That's why we're long just now.

Having suspected some little vacuum early in the new week, and then a bump-up, but with that first one will likely falling back, with the next having a better chance to work, we don't find today's action unacceptable, so would be pleased if over the day or so gets a better rally gets formed (of course less so in the multinationals than in the primarily domestic-centric technology stocks). In this regard the late failure Wednesday was somewhat political; somewhat technical (because the 200-day of the NASDAQ again came out briefly, and a little emotionally); somewhat seasonal of course, and somewhat related to the belated-recognition of many to what the Oil rise and Dollar excessive strength (that we've been talking about for weeks) really meant for big-cap earnings. It was our call early this week for Oil to again make an effort at topping (as shorts were ran in the wake of the OPEC squeeze), and so far that seems to be progressing on target.

The McClellan Oscillator is around -7, which is an after-the-fact mechanical sell signal in what should still be a longer term favorable condition; and probably reverses at least daily Thursday. The market remains a very choppy affair, as we move towards Triple Expiration. S&P premium tonight is around 2300, with the S&P futures slightly above the regular Chicago close of 1507.50. We're long the S&P overnight on the 900.933.GENE hotline guideline (from the 1497-99 area). It might be notable to suggest that odds of a generalized panic are somewhat mitigated by what in fact already happened this past spring, though we know how emotional momentum managers can be on the short-run, which probably contributes to the rapidly of some of these directional shifts, which are really incredibly fast when they occur. The market is trying to reverse here for at least a daily basis advance, and possibly more, in our view. While open-minded to further pause thereafter, this is so far moving in accordance with the 1st half of September risk, which becomes reduced (amidst angst) as we move into the 2nd half of the month, or so we suspect at least now.

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